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Posted October 18, 2007

Ask An Expert

Finances: How 'Caregiver Contracts' May Help Reward You

Q. Are you aware of tax benefits for the elderly, when they award a caregiver a salary, to save on taxes?

Cynthia Y., Marion, Ohio.

A. I believe you are referring to a special type of contract which is gaining more attention across the country. Elder law attorneys are creating what are known as "caregiver contracts," legally binding contracts which specify the types of services and amount of service provided by family caregivers for a specific dollar amount.

The interest in setting up this kind of formal agreement is growing as more and more elders are concerned about meeting the "spend down" rules that apply when an individual applies for Medicaid. Many elders are now turning to caregiver contracts as a way to prevent falling into a disqualifying penalty period which can occur if one's assets have not been used in a manner deemed appropriate by Medicaid.

Depending upon how the caregiver contract is written, there may actually be tax consequences for the elder who enters into such an agreement as the elder essentially becomes an "employer" with all the tax and Social Security payments that come with hiring any employee.  

There are some situations where an older adult may award a lump sum amount to an adult child to reduce their assets and thereby reduce taxes. However, once again, these kinds of agreements should only be done with careful consideration of all consequences and with appropriate legal advice. For example, you need to know what will happen if the adult child becomes ill, dies or otherwise cannot fulfill their caregiving obligation. 

My advice would be to proceed with caution. Most attorneys will provide at least a free consultation to hear about your concerns and to let you know what your options might be.

Given the long-term and financial consequences involved, it's well worth your time to talk with those who are best prepared to answer specific questions about your specific situation.

This answer is provided by Paula S. McCarron, a writer with more than 20 years of experience in healthcare, including nursing homes and hospice. Her writing includes extensive reporting on caregiver compensation issues. She lives in Chelmsford, Massachusetts, and can be reached at paulamccarron@gmail.com.

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